Legal Independence of the National Bank of Ethiopia as a Supervisor and Regulator of the Banking Business

Abstract

Central bank’s independence has been an issue since distant past in history and many states were striving to assure independence of their national banks. However, African countries including Ethiopia are found to have challenges in that regard. Having this fact in mind, the central objective of this paper is to assess de-jure independence of National Bank of Ethiopia in light of internationally accepted indicators of independence. Independence of central banks has two categories: industry and political autonomy. Political autonomy again has other three categories. These are objective autonomy, instrument autonomy and economic autonomy. There are two internationally agreed indicators to assess the independence or otherwise of national banks, namely legal and non-legal indicators of independence. The former includes banks having objective independence, monetary policy independence of banks, existence of clear and open conflict resolution mechanism, institutional independence, and limited credit to the government and financial autonomy. The latter, on the other hand, incorporates turnover to governor of central bank and empirical evidence regarding practical enforcement of legal indicators of independence.

Weighed in light of the first indicators, the National Bank of Ethiopia is far less independent. Some of the indicators of less independence of the National Bank include first absence of plain indication about objective autonomy (because it is accountable to the central government). Second, a long handed intervention of government over the affairs of the National Bank such as appointment of chairperson and board members of the Bank; and lastly, absence of an explicit limit over the money to be borrowed by the government from the National Bank. One way or another, independence of the National Bank of Ethiopia is very problematic. Hence, recommendations are forwarded requesting for a lessened intervention of government and its politicians in the affairs of National Bank.